The federal government needs to strengthen its foreign investment review process to include new mechanisms to enforce promises made by would-be acquirers, notably commitments by state-owned enterprises to conduct business as commercial companies, former Conservative industry minister Jim Prentice says.
As Ottawa assesses two proposed oil industry takeovers by foreign, government-controlled companies, it is also retooling its foreign investment provisions to provide greater transparency and clarity, and to send clear signals to foreign capitals that their state-owned enterprises (SOEs) will be expected to conduct themselves according to Western business practices.
The government is expected to release decisions on Beijing-based CNOOC Ltd.'s $15.1-billion planned purchase of Nexen Inc. and on Petronas's $6-billion proposed deal for Progress Energy Corp. before the end of the year, along with its new foreign investment policy guidelines that will primarily focus on SOEs.
Government sources say Ottawa is working on a menu of options, which include a more sharply delineated, two-track system for judging whether a foreign takeover provides a net benefit to Canada – one track for transactions by private-sector corporations and another for those under the influence of foreign governments.
Prime Minister Stephen Harper is also keen to reassure Canadians that commitments made by foreign acquirers will be kept. In order to win approval from Ottawa, for their deals, CNOOC and Petronas will likely have to agree to review mechanisms aimed at assuring Canadians their commitments are being kept, said industry sources close to the deals.
In a speech in London on Wednesday, Mr. Prentice said he expects the government's new investment framework will provide greater emphasis on how state-owned enterprises need to be governed in Canada, including whether they have public shareholders, independent directors, audit committees and policies to protect minority shareholders.
"Considering that Canada will, for many decades to come, be a major global supplier of energy, we can therefore expect that the government of Canada will draw distinctions between free-market foreign capital and that of state-owned enterprises," said the former Conservative minister, who is now vice-chairman of Canadian Imperial Bank of Commerce.
Ottawa will remain open to foreign investment from emerging markets and government-controlled companies, he assured the foreign business audience.
In fact, the Harper government has openly courted investment from Chinese and other state-owned companies, through there is a sizable group of Conservative MPs and cabinet ministers who worry about foreign governments, notably Beijing, gaining more control of Canada's resource sector.
In a telephone interview, Mr. Prentice said the Harper government needs to find a balance that would allow more transparency of its investment review process, more enforcement of undertakings, and more clarity on SOEs., while maintaining the necessary confidentiality and flexibility.
"In circumstances where clear obligations are undertaken, there needs to be a way to ensure they are lived up to," he said. Currently, Ottawa must go to court when it believes a foreign company has failed to meet its undertakings.
Another former industry minister, John Manley, said Ottawa has to accept foreign investment from SOEs if it wants to attract the capital needed to develop the resource sector. He noted Conservative ministers have aggressively courted Chinese investment, which comes primarily through state-owned enterprises.
"If you are going to encourage investment, particularly in your energy sector and oil and gas extraction, you are almost certainly going to have to deal with SOEs because in most of the world, that's how it's done," said Mr. Manley, a former Liberal minister who heads the Canadian Council of Chief Executives.
"Having asked them to come, it's rather important to make clear what the rules are," said Mr. Manley, a former Liberal minister who heads the Canadian Council of Chief Executives.